Question: 1. Calculate both the arithmetic and geometric average returns for large-company stocks and T-bills from 1970-1975. Year Large Co. Stock Return T-Bill Return 1970 3.94%

1. Calculate both the arithmetic and geometric average returns for large-company stocks and T-bills from 1970-1975.

YearLarge Co. Stock ReturnT-Bill Return

19703.94%6.50%

197114.304.36

197218.994.23

197314.697.29

197426.477.99

197537.235.87

2. Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the average risk premium over this period?

YearLarge Co. Stock ReturnT-Bill ReturnRisk Premium

19703.94%6.50%

197114.304.36

197218.994.23

197314.697.29

197426.477.99

197537.235.87

33.3036.24

3. Is it possible for the risk premium to be negative before an investment is undertaken? Can the risk premium be negative after the fact? Explain.

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